A blog about economics, finance, business and corporate governance. My background is in economics, with degrees from Columbia and Johns Hopkins. A career in international development, equity capital markets and as a corporate finance chief and board member lead me to think about events in a different way--hence the blog's name.

Friday, December 6, 2013

We've known for some time that oil and gas markets have been out-of-whack on an energy equivalent basis, as the above slide from Mark Perry's blog shows. Now, the fear going forward is that a glut of U.S. crude supplies and growing demand for natural gas in various forms will make the chart turn sharply upward. Aren't global commodity markets fun?

How does this relate to Louisiana? Shell announced that it had abandoned plans for construction of a massive GTL ("gas to liquids") plant in Louisiana, south of Baton Rouge. The part that is hard to fathom is the report in the press that the costs of the plant had reached over $20 billion from $12.5 billion projected in September 2013. There were some suggestions that it was due to a shortage of skilled labor and materials. If it were indeed due to rising material prices for say, steel, that isn't apparent in government statistics. If it were due to a shortage of skilled labor, which could be possible, it would be cheaper to bring people over from Shell's collapsing Nigerian operations or from declining North Sea operations and buy them homes in Louisiana. Or, it could be higher anticipated regulatory costs. However, one looks at it, this kind of increase is a bit hard to believe.

Shell began a long term research and development project in 1970 when it began tinkering with the Fischer-Tropsch process for producing liquids from gas. Fast forward through decades, and Shell opened the first commercial GTL plant in Bintulu, Malaysia, with a nominal output of 12,500 bpd in 1993. The company learned by doing the risks associated with the process, According to the company, air pollution from forest fires caused an explosion in Bintulu's air separation plant which led to an explosion that shutdown the operation until it resumed again in 2000 at 14,700 bpd. By now, of course, Shell had thirty years of experience with the complexities of producing liquids--diesel and aviation fuel, advanced lubricants--and commercial byproducts like naptha and paraffin, as well as recoverable sulphur which could be pelletized for input into fertilizers and other products. Bintulu has been the laboratory for the extraordinary Pearl project in Qatar.

Pearl came online in 2006 at ten times the capacity of Bintulu. Its first commercial shipment was in June 2011, and the plant was scheduled to be at peak production by the end of year 2012. In almost every way, design, construction, efficiency, process management, and partnership with the Qatari partners, this operation is remarkable. The plant is tied into offshore gas fields operating in forty meters of water and delivering 1.6 billion cubic feet of wellhead gas into the plant. Pearl provides 8% of Shell's worldwide gas output, according the company's documents. The plant is self-sufficient with its water use, and virtually everything that is recoverable is sold. This was the kind of plant slated for Louisiana, and what a shame that it won't be built in the foreseeable future.

Shell has to integrate $10 billion in acquisitions, which were to be funded partly by asset sales which have been slower than planned. 2013, according to the company, will be a peak year for net investments, and it is expected that asset sales will step up in 2014-2015. The company says that its preferred options for the future lay in deep water Brazil and in Canada with heavy oil. The latter seems hard to believe as well.

Critics say that the company has put itself into this bind by overspending in Alaska with little to show. At the same time, Nigerian output losses and the planned sale of assets are weighed heavily on third quarter 2013 and will continue.

Our energy policy has blocked pipelines and also blocked the shipment of our shale oil production by rail for environmental reasons. Meanwhile, after fining BP billions for coating ducks and sea life with oil --which was mitigated pretty conventionally washing the animals with soap--comes the news that wind farms get a pass from actually killing the American eagle, and endangered species. Mamma mia.